Early-retirement wannabe

AlwaysLearnin

I've only quickly read this tonight, and jamesd has picked up most of the points I thought of (and more), but just a couple of other questions that came to mind:

1. Will you and/or your wife qualify for full state pension under the new rules?
2. Does the £20k desired income figure include your wifes income?
3. Could there be an arguement for boosting wifes pot to make use of her personal allowance at least? Just thinking 40% relief but paying 20% tax on the way out (longer term) may not be much difference to 20% relief and 0% tax on the way out?
4. If your wife is likely to remain a non tax payer, there might be alternative savings options that could utilise her personal allowance outside of ISA.

The latter two are more general thoughts for debate...

Sorry if missed something, but as mentioned I could only scan.

Also, apologies to ML for continuing the thread highjack (but it's an interesting one...:))

OffGridLiving

AlwaysLearnin wrote: »

I've only quickly read this tonight, and jamesd has picked up most of the points I thought of (and more), but just a couple of other questions that came to mind:

1. Will you and/or your wife qualify for full state pension under the new rules?

Yes, we'll both hit the full 35 years.

1. Does the £20k desired income figure include your wifes income?

Yes, though this is a minimum. Anything on top is gravy.

1. Could there be an arguement for boosting wifes pot to make use of her personal allowance at least? Just thinking 40% relief but paying 20% tax on the way out (longer term) may not be much difference to 20% relief and 0% tax on the way out?

This is what was on my mind, I at least wanted her income to be as close to the annual tax free allowance as possible.

1. If your wife is likely to remain a non tax payer, there might be alternative savings options that could utilise her personal allowance outside of ISA.

This difficult to know, and although we'd get a better savings return outside the ISA, if her tax status ever changed then it'd take a while to get those savings back into a tax free wrapper.


The latter two are more general thoughts for debate...

Sorry if missed something, but as mentioned I could only scan.

Also, apologies to ML for continuing the thread highjack (but it's an interesting one...:))

Thanks for your thoughts.

jamesd

OffGridLiving wrote: »

E. From 55 you can take personal pension lump sum and drawdown income to accumulate more money

How does this make more money than leaving the pension savings invested ?

In this context it wasn't about making more money but about making more money available.

Your plan was to retire at 60. When taking an income from a pension using drawdown the amount of income you can take is capped by the GAD limit. If you waited until age 60 that would limit your income. If you start at 55 you still have the same limit at age 60 but now you have the potential to have accumulated five years of income that you can draw on at any rate.

That in turn means that you may not need to draw on money in other tax wrappers, say not taking income or capital from an ISA but leaving it there to retain its tax advantage.

However, it can be used to make more money if you don't need to do that:

0. When you take a personal pension you get 25% of the pot out tax free. That's a pure tax gain: 40% tax relief on the way in, no tax on 25% of it on the way out. But this is true at any age, so it's not the initial gain, just background.
1. If you recycle the income, or lump sum within the limits for that, you get a second chunk of tax relief on the same money. And another 25% tax free lump sum. Which is why there are restrictions on lump sum recycling, it's a good deal...:)
2. If you are making pension contributions via salary sacrifice you also gain from the saved employee and possibly some employer NI.

So whether it's for availability or to make more money it's potentially useful.

You do need to allow for the changed death benefits that come after taking benefits from a pot. Instead of 100% inheritable with no tax charge, it's 100% to a spouse pension pot with no tax charge, else 55% tax charge outside a pension pot to anyone. If necessary you can use insurance to cover this and still be ahead.

jamesd

OffGridLiving wrote: »

Could there be an arguement for boosting wifes pot to make use of her personal allowance at least? Just thinking 40% relief but paying 20% tax on the way out (longer term) may not be much difference to 20% relief and 0% tax on the way out?

If there's any prospect of her being a higher rate tax payer it's better to wait. Money outside a pension can be paid into it at any time in the future, subject to the annual allowance. So no hurry if patience might get more tax relief later.

If she can use salary sacrifice and you can't, that helps her case look a bit better because for a basic rate tax payer salary sacrifice gets them closer to higher rate tax relief levels due to the higher employee NI rate for basic rate tax band income. But it's still not as good as higher rate relief, so waiting beats it.

S&S ISA is probably the best choice for her. Same growth available as in pensions and that lets her get the higher rate relief later by moving money to a pension (or from you to keep hers in the ISA) if she ever gets there.

AlwaysLearnin

Sorry, I meant paying in to his (40% in 20% out) v's in to hers (currently non tax payer, so 20% uplift in up to limits and potentially 0% out).

£20k equiv with two full flat state pensions should be very acheivable

gallygirl

Goodness, I knew nothing about recycling lump sums, I thought once you drew out your lump sum the pot was frozen and you couldn't add to it? So, I could start to draw at 55, take a lump sum, and pay back in any residual income I didn't need (subject to the rules which will take a bit of getting my head round.....)

Learning more every day, thanks all, and especially James :T.

jamesd

The lump sum recycling rules start at RPSM04104900 with the main rules at RPSM04104920. Two really easy ways to stay within the rules:

1. Take a lump sum of less than 1% of the lifetime allowance taken each year. The lifetime allowance is £1.5 million until 5 April 2014, then drops to £1.25 million from 6 April 2014. So 1% is £15,000 falling to £12,500, corresponding to taking benefits from £60,000 and £50,000 of pension pot.
2. or increasing total pension contributions by less than 30% of the lump sum value, calculated over the two years before and after taking the lump sum and the year of taking it.

With the two years each side part it's easy enough to use say offset mortgage money to make extra contributions starting three years before, so that there is not an increase in the following five years. Maybe a decrease instead. Or easy enough to do only 30% more in the two years after then the rest later. A little patience or pre-planning can make it quite easy.

The rule was put in place to stop rapid pay in, take out, recycle, repeat approaches that over a couple of months could see three or four recyclings of the same money.

Pension providers can choose how they handle taking benefits in stages. Most, including HL, choose to just combine them all into one pot. So you don't end up with ten pots if you take half a million of benefits in ten pieces. But it is possible to have them split, which might be a pain for lower values.

For those who do let you split, there's a potential advantage. Once you have a pot in drawdown it can only be transferred as a whole, no partial transfers. So if you deliberately create chunks of say £100,000 you can get more moving flexibility. You can also do things like staggering start dates, so different chunk have different GAD calculation dates. That can let you avoid having a GAD calculation for it all at a time when markets are down. If you happen to have a provider who combines, you can split by doing a partial transfer to another provider, taking benefits, then transferring back - the can't combine/split rule will bar them from combining with your existing pot.

jamesd

gallygirl wrote: »

I thought once you drew out your lump sum the pot was frozen and you couldn't add to it?

That's right, you can't take benefits then just pay new money into the pot you've taken benefits from.

But:

1. You can pay into another pot with the same or a different provider.
2. If the provider uses the combine pots approach, when you take benefits from the new pot that will be combined with the existing one.

So provided you know the rules you can still get it done, just not directly.

OffGridLiving

This recycling might work really well for me. I'm 45 and I intend working for my current employer for about 5 years before moving to a new company. I was intending moving the (now) closed company pension into my SIPP, but I'm now thinking that I should move this into a new SIPP.

At age 55, I could have SIPP1 (£150k), SIPP2 (£40k) & company pension (35k).

I could put SIPP1 into drawdown and move the 25% lump sum into SIPP2. This would be £37500k + 40% tax rebate (£15k) = £52500.

A few years later (say age 58), I could put SIPP2 into drawdown and put the 25% lump sum into my company pension. This would be £25k + 40% tax rebate (£10k) = £35,000.

I then retire at 60 and my various pensions would have:
Company Pension: £70k
SIPP2 (drawdown): £75k
SIPP1 (drawdown): £113k

So by recycling 2 pension tax free lump sums, I could gain £25000 in tax rebates. Sounds too good to be true, what's the catch!!?

Uglymug

I always planned to retire early, and a few months ago just prior to my 57th birthday I took early retirement.

7 years ago, when the retirement age was still 50, I put my plan into action and started taking pension benefits.

I started by salary sacrificing a third, then a half and then two-thirds of my salary to my company pension (added to this was a meagre £1000 a year company contribution plus the employees NI saving it made - 13.8% in the final year).

Once a year, I crystallised and took my 25% tax free lump sum, I also took the maximum pension income - this being subject to tax but no NI (you do not pay NI on pension income). This enhanced my reduced salary for my day to day living costs.

In my final working year, I earned circa £45K, a salary sacrifice of £30K meant that just over £35K went to my pension (£30K X 1.138 + 1K). The £15K of paid salary was subject to about £2.25K tax and NI, so on a salary of £45K I ended up with about £47.75K (mostly in a pension). I got a Tax free lump sum of £8.75K (25% of £35K) and a income of about £5K (£4K after tax) from my Sipp drawdown.

My total income for the year was about £25.5K (£12.75K + £8.75K + £4K) - not too short of what I’d got from my £45K after Tax and NI without any pension contribution.

My employer insisted my pension contribution went to their pension provider, so I contributed to their cash fund (none of their other funds appealed) and, again, about once a year I transferred to my Sipp where I could properly invest (I’ve traded in shares since Thatcher’s privatisation days).

In this manner I’ve built my Sipp up and it now holds circa £150K (crystallised), this generates a pension of just over £8K (the income’s gone up quite a bit this year due to the reintroduction of 120% Gad), I also have a final salary pension from a previous employer which I took early and gives circa £6K So at age 57 I’m living on a pension of £14K. (This suffices since my mortgage is paid and my 3 kids have left home). In 9 years time I’ll get my state pension of circa £500/month (after tax). I’ve got more than enough in savings to cover this shortfall for 9 years if needed. So in 9 years I’ll be on circa £20K in pensions.

Things to be aware of:

1) There are pension re-cycling rules that must not be broken. It wasn’t too difficult to keep within these, but they are getting stricter all the time.

2) My investments in my Sipp could go down, but if my associated Sipp income is halved it just means I don’t pay any income tax.

3) My 2nd state pension has gone down a bit because I have not been paying very much NI in the last 7 years - From what I’ve found, it hasn’t gone down that much.

4) If I’d lost my job in the last 7 years I would not have been entitled to any benefits (because I was drawing a pension) - so what - if I did manage to get Job seekers, it was only about £70 per week for 6 months.

People, especially the press, are always very negative about pensions - I think they’re great.